To my surprise many authors have embraced Kindle’s deep discounts of books. They are pricing ebooks at $9.99 or less. Apple and five of the biggest publishers created an alternative model that lets publishers set ebook prices. This model helps Apple build a competitive advantage against Amazon’s Kindle books, and it pays more to authors, yet many authors are not happy with it.

The reason for the Agency Model of ebook pricing

Amazon sells millions of Kindle books: Apple’s iBooksore is still in the hundreds of thousands stage. Amazon can charge a 50 cent fee per copy on sales of 2 million Kindle books and sill make a million dollars. Apple, on the other hand, is presumed to want higher prices for ebooks so it can get a better profit from the smaller number of ebooks it now sells.

The most important thing for ebookstores is not sales of individual titles as is the case with publishers. Ebookstores make their profit on their total volume of ebook sales. They collect a 30% to 70% flat fee from the price of each copy sold of the downloadable digital-book titles they display on their servers.

While ebookstores do offer a so-called “bestseller” ranking system for books, it isn’t based on sales: it’s based on keywords and page visits to the book’s display. A giant ebookstore like Amazon does not have to care a whit whether or not if a particular book becomes a bestseller. What matters to it is that it gets a bigger total volume of ebooks to sell.

Apple is way behind Kindle. So, with the blessing of five of the largest publishers. it’s pushing against Kindle’s deeply-discounted pricing of ebooks. So far Apple has won its battle — at least for awhile. Investigations and lawsuits by readers have been brought against Apple and the big publishers for price-fixing. In addition, self-publishing authors are complaining Apple does not allow them to set their own prices. They feel they could make more sales if they could price their books themselves.

Why publishers signed on to Apple’s Agency Model

Why are publishers still going along with ebooks that are priced lower than the print copies? From a publisher’s point of view, an ebook is simply icing on the cake. They have already paid for all the expenses, including advances to the author for his/her expenses in writing the book. The cost of an ebook version to a publisher is simply the digital formatting expense and the fee paid to ebookstores. Advertising costs for the ebook title are low; they just include the ebook in existing advertising for their print version of the book.

The bottom line is that ebooks are gravy for big print-book publishers! Publishers have far fewer titles to sell than ebookstores. Publishers need to care quite a bit more than ebookstores about promoting individual titles. They pay much lower royalties to authors than ebookstores do. So a higher price on the book means a higher profit for publishers. When it comes to pricing ebooks however, what big publishers look at are their costs. The “marginal” cost of adding ebooks to their repertoire of products is quite low — but only for now!

The future may be a different story for them. Publishers are also racing back to the vaults to dig up books that are out-of-copyright to sell as ebooks. Those are quite popular, and can even be used as free or very low cost loss-leaders for their new ebook offerings. But the writing is on the wall. Ebooks may well supplant print books, and at the same time become more expensive to create when all the app-type bells and whistles are added.

Why authors are signing on to Kindle’s cheap ebook model

For many self-publishing authors, the urge to put out a cheap ebook is the same as for a publisher. An ebook is perceived to be as an adjunct, an afterthought even, to a print book. And it makes sense to do more than one type of ebook because each ebook eReader has different types of readers who buy it. Multiple formats is the name of the game for authors.

Like publishers, authors have bought into what looks like it will be a very short phenomenon in the book publishing world. Once an author has written a book and put it out in print, it doesn’t cost much more to format it as a digital book for eReaders, so why not sell it for pennies? Even though Amazon Kindle store imposes a higher fee for rock-bottom ebooks priced below $2.99, its royalties still exceed those offered by traditional publishers. As a result, it seems like a real deal to put out a cheap ebook.

But here is what’s wrong with this picture. Publishers have built established reputations that help them sell their books. In addition, publishers sell many different books by different authors. They benefit from “returns to scale” in their business. As a result, their costs of production and marketing are lower than those of the individual self-publishing author. If one of their author’s title(s) doesn’t do well, their other client’s successes will make up for that. Publishers bear risk of losing money in their business, but it is a carefully-calculated risk. They price their books at an average that is based on their total costs plus a profit margin. This is why Kindle’s deep-discount pricing threatens not only their profits, but their very existence!

But I don’t see many ebook authors pricing their books based on their total costs of creating the book! Instead, authors are adopting Kindle’s approach. Authors are following the crowd and pricing their books at rock bottom in hopes that lower prices will create a higher volume of sales. This is fine if you are a committed new author who plans on doing more books, a well-known author, or you have a business and don’t care about making money on a book. In that case you will be using your book to build a big fan or client base to market other books, products, and/or services to. But for other authors, revenues from total sales only equal gross income. Gross income is just the first step. To earn a profit you have to deduct costs.

Net income (gross income less expenses) is what counts if you are an author hoping to make any money from a book!

The true bottom line for all authors

Often ebookstores will justify their high fees for hosting downloadable digital books by saying the “marginal cost” of “printing” an additional copy of a digital book is zero for authors. In economics the word, margin, refers to the last unit sold. For ebooks, audiobooks, and app books the margin is low, or even free, because there are no printing or shipping costs. So this statement is true — but only for the ebookstores! Once they host, display, and create na ebook-download-system for the first unit of a digital book, the rest of the copies cost them virtually nothing.

The irony of “marginal” cost is that this concept IS important to authors when they want to offer discounts or put their book on sale for a short period of time. The ebookstores, however, are not open to enabling an author to do that. They are not set up to allow for discounting or “flash” sales of books. An author considering doing discounted promotions after they publish, should consider doing a PDF or a print book version of their book in addition to their ebook version. It’s easier to discount the prices of these other formats for short book sales.

The true bottom line for an ebook is that an author still needs to recoup their costs in writing, designing, formatting, and marketing that first copy of the ebook that they sell!

In my opinion, neither published authors nor self-publishing authors of ebooks should accept Kindle’s deep-discount pricing books. The traditional book business is very competitive, with over a million book titles sold each year. The average book title is likely to sell a total of 300 copies over its lifetime. You do the math. At 99c cents, $2.99, $4.99, $7.99, or $9.99 less a 30-70% fee to the ebookstores, how much net income will you make on your ebook?

What about your revenues from the print version though? According to book consultant, John Eggen, the average first run for a print book is 3,000 copies, and there is no second run. So again, do the math. If you sell a total of 3,000 print and digital books, and you’d have to be very lucky or quite strategic to accomplish that, how much would you make after you deduct yourexpenses for your book?

Why is this important to know? Because whenever we choose to do something, there is an “opportunity cost” for the time spent on it. Our opportunity cost is calculated by asking ourselves what else we could have done with that time, and if money is important to us, how much we could have made doing that other thing. Calculating your opportunity cost for writing a book is the first thing you should to do in order to create a pricing strategy, and choose the formats and marketing channels, that will bring you the most returns from publishing your book!

NOTE: If you would like to get this blog by email, sign up for Authormaps Tips, my free newsletter. The sign-up box is at the upper right of my blog page on Authormaps.com. For current news about book publishing, follow me and see who I follow on Twitter @Authormaps. For my new post, “Will Your Book Get a Death Threat?” see my blog at WordmapsIndexing.com.

Tired of waiting for your royalties? Disappointed in your book sales? Feel like your publisher isn’t doing their job? What if I handed you a step-by-step plan to sell hundreds of additional copies of your book right now? Check this out.